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Our guide to Performance Share Plans (PSP)

Our guide to Performance Share Plans (PSP)

Our guide to Performance Share Plans (PSP)

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Performance Share Plans (PSP) serve as a strategic tool for companies aiming to align employee performance with organisational success. This comprehensive incentive program grants employees shares based on predetermined performance criteria.

Introduction of Performance Share Plan (PSP)

In this guide to Performance Share Plans, we explore the various aspects of this incentive structure. From understanding its core functionality to navigating the diverse benefits it offers, we provide insights into the establishment requirements, tax implications, and associated risks.

How Performance Share Plans Function

A Performance Share Plan (PSP) is an executive compensation strategy that aligns the interests of company leaders with overall organisational success. In a PSP, executives receive awards in the form of shares, and these awards are contingent on achieving predefined performance targets. The performance is typically measured against specific financial, operational, or strategic metrics. As executives meet or exceed these goals, they unlock shares, creating a direct link between their performance and financial rewards.

ESOP vs. shares_ how they differ

Advantages of Performance Shares

Performance Share Plans (PSPs) offer several benefits. They serve as strong incentives by directly tying executive rewards to the company’s performance, motivating executives to contribute to overall success. PSPs also encourage a focus on long-term goals, fostering sustained achievements. Moreover, they help retain talent by giving executives a stake in the company’s success, reducing turnover. These plans provide a clear and measurable way to evaluate executive performance, creating a results-driven culture. In essence, implementing PSPs strategically enhances organisational performance and strengthens the connection between executive leadership and corporate success.

Types of Performance Shares

Performance Shares come in various types, offering flexibility for companies to tailor incentive structures to their specific needs.

Here are some common types of Performance Shares:

Time-Based Performance Shares
Time-Based Performance Shares provide executives with shares based on a set schedule, not contingent on specific performance metrics. Executives receive an initial share allocation upon grant, and these shares vest gradually over a specified period, often tied to their tenure. The vesting schedule can be structured annually, quarterly, or as per another specified timeframe, encouraging executives to stay, especially in industries prioritising employee retention where measuring specific performance metrics might be challenging.
Performance-Vesting Shares
Performance-vesting shares blend time-based and performance-based vesting in equity compensation. Unlike traditional time-based vesting, where shares vest on a set schedule, these shares require executives to meet specific performance targets within a designated time period. Vesting hinges on predefined metrics like financial goals or stock price targets. Executives receive a share grant, and full vesting depends on meeting or surpassing established benchmarks. This aligns executive compensation with company performance, linking rewards to strategic achievements. Balancing long-term commitment (time-based) with contributions to the company’s success (performance-based) motivates executives to drive positive outcomes.
Relative Total Shareholder Return (TSR) Shares
Relative Total Shareholder Return (TSR) Shares tie executive rewards to the company’s stock performance compared to peers. Executives earn shares based on the total shareholder return relative to a selected group of peer companies. Calculation involves measuring the company’s stock price appreciation and dividend yield against predefined peers over a specified period. Outperformance results in a higher share allocation, while underperformance may reduce or eliminate the allocation. This aligns executive compensation with the company’s market performance, encouraging strategies that enhance shareholder value compared to industry competitors. Relative TSR Shares offer a performance-oriented incentive, fostering a competitive drive among executives for superior results in the market.
Factors to consider before implementing ESOPs

Requirement To Establish a PSP

Establishing a Performance Share Plan in Singapore involves a comprehensive approach. Firstly, in the design phase, clear objectives must be defined, aligning them with the company’s overarching goals. Additionally, specifying performance metrics that determine share or cash allocations is crucial. Legal and regulatory compliance is vital, requiring adherence to regulations set by the Accounting and Corporate Regulatory Authority (ACRA) and the Monetary Authority of Singapore (MAS).

Transparent communication with employees is essential, detailing the criteria for earning shares, the potential value of the awards, and clarity on vesting schedules and conditions. Employee eligibility is determined based on factors like job level, performance, and tenure, and the plan’s scope may include all employees or specific groups. Establishing performance metrics involves outlining key indicators relevant to the company’s objectives. Defining a vesting period with a graded approach encourages employee retention. Valuation methods for PSP awards, whether in shares or cash equivalents, need to be consistent and fair.

Efficient administration and record-keeping systems, potentially utilising specialised software are essential. Understanding tax implications for both the company and employees is important, involving consultation with tax professionals for compliance with Singapore’s tax laws. Obtaining board approval aligning with the company’s overall compensation strategy is the final step, ensuring the success of the PSP in motivating employees and aligning their interests with the company’s performance. Consulting legal, financial, and HR professionals is advisable throughout the design and implementation phases to ensure a seamless process.

Explore our comprehensive ESOP platform that simplifies the management and administration of your Performance Share Plan (PSP).

Tips for successful share scheme execution

Tax Treatment of PSP

The tax treatment of a Performance Share Plan (PSP) varies by locations and design features, with key considerations:

Taxable Event
Receipt of performance shares is often non-taxable; taxation typically occurs upon vesting when shares become transferable.
Taxation Upon Vesting
Upon vesting, ordinary income tax may apply on the shares’ fair market value, treated as compensation in taxable income.
Capital Gains Tax
Selling vested shares may incur capital gains tax, potentially more favourable than ordinary income tax rates.
Timing of Taxation
Taxation timing varies, some tax gains at vesting, others at sale.
Withholding Requirements
Taxation timing varies, some tax gains at vesting, others at sale.
Employee Deductions
Taxation timing varies, some tax gains at vesting, others at sale.
Social Security and Medicare Taxes
Taxation timing varies, some tax gains at vesting, others at sale.
International Considerations
Multinational companies face complexity due to diverse tax laws; compliance with international tax regulations is crucial.

Restriction and Risk on Performance Share

Implementing a Performance Share Plan (PSP) comes with certain restrictions and risks that require careful consideration:

Regulatory Compliance
Adhering to local and international regulatory requirements is crucial to avoid legal issues. Non-compliance may lead to penalties and reputational damage.
Shareholder Dilution
Offering performance shares may dilute existing shareholders’ ownership. Striking a balance between rewarding employees and maintaining shareholder value is essential.
Market Volatility
Fluctuations in the stock market can impact the value of performance shares. Participants may experience lower-than-expected returns if the market performs poorly.
Performance Metrics Ambiguity
Unclear or subjective performance metrics may lead to disputes. Defining precise and measurable criteria is essential to ensure fairness and transparency.
Employee Retention Challenges
While PSPs aim to retain talent, there’s a risk that employees might leave before the shares vest, resulting in unused allocations.
Communication and Understanding
Inadequate communication about the PSP details can lead to misunderstandings among employees, affecting morale and the effectiveness of the plan.
Financial Performance Dependency
PSPs tie rewards to the company’s financial performance. Poor performance may result in lower returns for participants, impacting their motivation.
Tax Implications
Tax regulations can change, affecting the tax treatment of performance shares. Staying informed about tax laws is essential to avoid unexpected financial consequences.

Frequently Asked Questions (FAQs)

Can performance shares decrease in value?

The value of performance shares can decrease. The value of performance shares is often tied to the company’s stock price or other predetermined performance metrics. If the company’s stock price declines or if the predetermined performance goals are not met, the value of the performance shares can decrease. This is a risk associated with performance-based compensation plans, as the value is contingent on the company’s overall performance.

Are there tax implications for receiving performance shares?

Yes, there are tax implications for receiving performance shares. The taxation of performance shares can vary based on the jurisdiction and specific tax regulations. In many cases, taxation occurs when the performance shares vest or when the recipient sells the shares. In some jurisdictions, the value of the performance shares at the time of vesting may be treated as ordinary income, subject to income tax.

Can performance share plans be customised for different employees?

PSP in Singapore can be customised for different employees. Companies often tailor PSPs to align with their organisational goals, individual roles, and employee preferences. Customisation may involve varying performance metrics, vesting periods, or the number of shares granted based on factors such as seniority, job responsibilities, or performance expectations.

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Why Your Business Needs Accounting Services in Singapore

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Why Your Business Needs Accounting Services in Singapore

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Accounting is one of the essential functions your business requires for robust financial management, no matter how small or large your company is. However, many business owners still engage an in-house accounting team to take care of these tasks. This not only takes up their valuable time but also heightens the risk of compliance issues that could cost their business in the long run. 30% of Singapore start-ups fail within the first three years, and poor financial management is one of the principal causes.

In Singapore, there are a number of accounting requirements your business needs to fulfil if they don’t want to be penalised, which could be stressful for your company to manage and be compliant with if you are low on resources.

This is where outsourced accounting services rise to the forefront. Outsourcing professional accounting services offers a multitude of benefits that go beyond just bookkeeping. These services help facilitate the financial operations and planning of your company, allowing for better management, cash flow, and compliance, whilst giving you more time to focus on your core business goals.

Discover what different types of accounting services are essential for business success, ranging from advisory to tax filing, and why getting them outsourced to a reputable accounting firm is pivotal to propelling your company to even greater heights.

Types of accounting services

There are numerous services that fall under the blanket of accounting, all of which need to be paid careful attention to in order for your business to run smoothly and efficiently. When you engage an outsourced accounting service provider, you should ensure they can deliver the following essentials:

  • Tax Accounting & Planning: Supports with all taxation-related matters, including but not limited to tax filing, tax preparation, and tax strategy.
  • Bookkeeping: Provides regular maintenance of all your company’s important records, reports, statements, and so on.
  • Statutory & Governmental Compliance Reporting: Ensures your company is operating in accordance with local laws, such as preparing financial statements in XBRL format.
  • Management Accounting: Conducts business analysis, identifies trends and opportunities, and advises on long-term strategies.

Accounting services: understanding why to outsource

What with all the different components of accounting, a high level of effort and expertise is required in order to carry out all these tasks correctly and in a timely fashion. Doing this in-house could prove to be a huge strain on many businesses, potentially resulting in errors and inefficiencies. By outsourcing these services to a professional accounting team, your company can effectively relieve all of these stresses, giving you access to individuals proficient in various areas of accounting, be it tax management or bookkeeping. This opens up the possibility of a range of benefits for your business, such as:

  • Staying compliant with statutory requirements and regulations
  • Saving on hiring costs and recruitment training time
  • Enjoying professional accounting advisory services from experts in the field
  • Gaining a clearer picture of your company’s financial health to make informed decisions
  • Maximising your tax savings and deductions
  • Establishing an organised and automated accounting flow

What is the upside of accounting advisory services?

Accounting advisory services guarantee your business gets the best, most credible advice on any accounting issues you need to handle, no matter how technical or specific these instances may be. By nature, professional accountants have extensive knowledge of all aspects of financial reporting processes in accordance with local laws, which includes the Singapore Financial Reporting Standards (SFRS). They will also keep your business up-to-date with all the latest rules and regulations, making sure you know what is going on at all times, and thus ensuring you stay compliant in a field that is constantly evolving and changing.

What can accounting and bookkeeping services do for my business?

Bookkeepers in an accounting firm can help you to keep a record of general ledger reports, trial balances, profit and loss statements, balance sheets and schedules.

Bookkeeping also involves bank reconciliations, which compares your accounting data to what the bank has recorded, helping to identify any discrepancies in your records or possible transaction errors.

An accounting firm doing your bookkeeping also ensures that all relevant documents and information (financial statements, tax computation and supporting schedules, comprehensive profit and loss statements) are kept for easy reference. This helps to speed up the retrieval of documents for statutory reporting and filing of taxes.

With thorough and updated bookkeeping services, you can swiftly identify problems related to revenue and cash flow early, helping to avoid any adverse impacts on your business if otherwise left unchecked.

Why does my company need statutory accounting and tax compliance reporting services?

As your business grows, there will be a myriad of legal obligations your company has to comply with. These obligations include the notification of changes of share capital if new shareholders or directors are added or removed, as well as the meeting of tax and accounting requirements that could change depending on your business model and activities.

Another key obligation is the filing of year-end financial statements and board resolutions that are needed by Singapore’s Accounting and Corporate Regulatory Authority (ACRA).

A credible accounting firm assists you in the understanding of convoluted statutory requirements and ensures that you comply with the laws.

The last thing you want is an audit by IRAS digging through your past records, wasting even more of your resources and time or worse – issuing a hefty fine to your company for non-compliance and/or errors!

How can tax and accounting planning services help my business?

While staying compliant is of critical importance, outsourcing your tax and accounting services in Singapore allows you to enjoy tax breaks and exemptions that you might have been unaware of, whilst helping you develop long-term planning strategies to help you achieve significant tax savings over time.

To claim certain tax rebates and business expense deductions, you must meet a set of qualifying conditions. Many nuances are involved in obtaining these deductions successfully and legally.

Moreover, if you conduct business overseas, there are numerous tax treaties that you may be unfamiliar with. This could lead to double taxation, causing you to pay more taxes than you need to.

A professional accounting firm can advise you on all the tax benefits you are entitled to along with helping you obtain them so that you minimise costs and keep profits high.

If your business is spread across different locations, these services can also evaluate the tax consequences of cross-border transactions to improve your company’s tax position, having a breadth of knowledge of different jurisdictions. In short, they are readily equipped to support and advise on all your tax accounting needs.

How will management accounting services help my business?

Accounting doesn’t just keep you compliant with regulations, it is also a component of good business management that can help your company to grow.

A regional accounting firm has management accountants that can conduct a business analysis of past and present accounting data, as well as help analyse different sales channels, products, services, marketing activities and business models.

Management accountants will analyse the basic data and make forecasts, budgets, performance measurements and plans, then present them to senior management to assist in its operational decision making. A management accountant may also identify trends and opportunities for improvement, improvement, analyse and manage risk, arrange the funding and financing of operations and monitor and enforce compliance.

By staying up to date with industry trends, management accounting can provide and advise on long-term strategies that enable you to surpass your competitors and achieve your business objectives.

Do accounting services include accounting software?

As part of their service offerings, some outsourced accounting firms use specialised accounting software to streamline business operations – such as Xero Cloud Accounting System, which BoardRoom can help set your business up with as a Xero Platinum Partner.

It takes more than just getting the software set up in order to boost your accounting efficiencies, which is why working with a team of experts who are well-versed in the accounting system’s implementation is crucial. By assisting with set-up and optimisation, your company can then fully leverage the benefits of accounting software, whilst having peace of mind that your financial data has been transferred securely and correctly.

Choose BoardRoom as your outsourced accounting services provider in Singapore

Whether you’re running an SME or are part of a multinational organisation, hopefully this article has helped you better understand why your business will appreciate the advantages of outsourced accounting services.

At Boardroom, we are experts in accounting, helping companies from corporations to fast-growing SMEs, with their accounting outsourcing, allowing them to focus on what matters – growing their business and getting more clients.

From handling tax accounting to managing statutory compliance reporting for companies in Singapore and across Asia-Pacific, we help companies with our full suite of accounting services, allowing them to remain compliant, maximise their tax benefits and stay organised in their bookkeeping.Contact us today and empower your organisation with greater freedom through our accounting solutions.

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